3 Merrill Lynch Brokers Led Investments
A trio of wealthy Merrill Lynch bond brokers, operating out of a pink marble office tower in the heart of this city’s upscale financial district, became Orange County’s main conduit for high-risk investments.
Orange County Treasurer-Tax Collector Robert L. Citron was self-assured and outspoken in his investment strategy, but Merrill Lynch’s team was ready to back Citron’s every instinct and earn multimillion-dollar fees in the process.
The team was lead by the savvy but hard-edged Michael Gus Stamenson, 54, a silver-haired former Marine with a taste for expensive antiques and vintage wine.
With his two junior partners, Debra Harris and Duane Canaga, the trio were known throughout California’s local treasurers offices and local finance agencies. When treasurers associations would meet, Stamenson would impress the groups with his sophisticated Wall Street views.
All three brokers declined to comment, but a Merrill Lynch spokesman said all remain employees in good standing.
Merrill’s San Francisco office came to dominate the lucrative field of brokering and underwriting securities for local government agencies over the last decade.
Merrill Lynch officials supported Orange County’s disastrous investments that bet on a decline in interest rates this year, supplying Citron with company reports that projected rates would drop. The majority of Wall Street economists had an opposite view.
Merrill Lynch is the subject of federal and state investigations into whether its brokers properly marketed high-risk securities to Orange County. Stamenson, Harris and Canaga were named in subpoenas for records served Wednesday by the federal Securities and Exchange Commission on members of the Orange County Board of Supervisors.
The subpoenas are seeking a lengthy list of official and personal records amid allegations that Merrill Lynch’s influence in Orange County was abetted by personal gratuities and gifts that found their way to government officials, according to sources close to the investigation. Stamenson, Harris and Canaga each donated $1,000 to Citron’s reelection campaign June 13--six days after he was reelected. Campaign statements show that Stamenson’s wife also gave Citron’s campaign a $1,000 donation on the same day.
The next day, the Board of Supervisors approved Citron’s recommendation on the issuance of $600 million in taxable notes, with Merrill Lynch as the underwriter.
Stamenson could both charm and intimidate. Neighbors describe him as gracious, but a local building contractor, Paul Barendregt, who worked on Stamenson’s $1.1-million home, says he is a “little bit of a Napoleon as far as his height and his attitude toward people.”
Although Stamenson, 54, demonstrated just how tough he could be in 1988 when be bared fists with a lobbyist and walked away with a bloody nose, he also has a capacity to ingratiate.
“He came over the very first day we moved in to say hello, very casual and friendly,” said Mary Ann Tataseo, his next-door neighbor of several weeks.
Stamenson invited Tataseo to his annual Christmas bash, where he has hosted more than 100 guests in past years at his 13,000-square-foot mansion with a water fountain in the front yard and a late-model Mercedes in the driveway.
Harris, 39, and Canaga, 51, also appear to be well-rewarded for their work. Harris, who has worked at Merrill for 14 years, lives in a $1.2-million home in the San Francisco suburb of Lafayette, according to property tax records.
Canaga owns a $368,500 condo in a hilly section of San Francisco. He came to Merrill Lynch after his construction business was forced into bankruptcy in 1985 when a partner in a project ran into financial difficulties, according to National Assn. of Securities Dealers records.
Canaga flunked one of his brokerage exams in 1991, company records show, although he passed the next year. Asked for comment Thursday, Canaga referred all inquiries to Merrill Lynch headquarters in New York and hung up.
The trio of brokers were able to cement a trusted relationship with government employees. But exactly who was calling the shots is likely to be hotly contested for months or even years to come.
Citron’s attorney David Wiechert said: “As treasurer for the county of Orange, Robert Citron relied on the advice of securities professionals in making investment decisions, none more so than representatives of Merrill Lynch. The suggestions . . . that Mr. Citron was on some uncounseled frolic and detour or that he had the same level of expertise as his financial advisers is mere sophistry.”
However, treasurers in such counties as Monterey and Contra Costa continue to vouch for Stamenson, Harris and Canaga, saying the Merrill team has gotten a bum rap and that the leveraged investment strategies they sold in Orange County and around the state should not be curtailed.
“This is not some flaky firm from Texas or Arkansas,” Monterey County Treasurer-Tax Collector Louis Solton said. “I am comfortable with Merrill. I would have to be compelled to deal with another investment house. They have a reputation, as a firm, that precedes them.”
Monterey has a $237-million pool of derivative securities, brokered exclusively by Harris. Solton said that Harris shares a mutual understanding with him about the county’s investment view--which is that derivative trading is a low-risk, high-return strategy despite Orange County’s disaster.
Sonoma County Treasurer Don Merz said his dealings with Stamenson and his staff for 14 years have left him believing that they are getting a bum rap in the Orange County disaster.
“A lot of Mike’s presentations were on the pitfalls in terms of investment practices,” Merz said.
The loyalties between the Merrill brokers and their clients ran deep. An audit in Orange County disclosed that Citron bought and sold securities in 1991 to help Merrill Lynch meet certain federal requirements on its finances.
No doubt Merrill’s brokers valued their close relationship with the treasurers. Orange County’s business with Merrill Lynch generated millions of dollars of fees and commissions annually.
In the process, Stamenson, the son of a Greek immigrant, became a very wealthy man. Stamenson earned $769,000 in 1991, according to a divorce filing by his former wife, and industry sources say that his earnings rose sharply in 1992 and 1993--possibly as high as several million dollars.
Earlier this year, according to property tax records, Stamenson paid off the $937,000 mortgage loan on his home, a brick Tudor on the most prestigious street in the wealthiest gated section of the affluent East Bay suburb of Moraga.
When a reporter knocked on the home’s massive oak doors earlier this week, Stamenson’s wife peered from a crack in the door and said the couple would have nothing to say about the Orange County investment crisis.
Stamenson’s wife listed her occupation on their marriage certificate as a restaurant hostess. They were married after a divorce from his wife of 24 years. In the settlement, Stamenson kept the couple’s mansion, along with antiques, a wine collection and a boat.
Al Lomeli, Contra Costa County treasurer, acknowledges that Stamenson has money, but he “never rubs it in your face.” Lomeli invited Stamenson to his wedding and attended Stamenson’s wedding.
As Orange County fell deeper into financial trouble, Citron made ever riskier bets structured by Merrill Lynch and other brokers.
The SEC and the California Department of Corporations are investigating whether Merrill Lynch and Stamenson violated their duties to sell investments with risk that is appropriate for taxpayers’ money.
One November trade has attracted particular interest. Merrill underwrote a 10-year note issued by the Student Loan Marketing Assn., or Sally Mae. Merrill sold the entire $600-million issue to Orange County at a price of $100.628 for each $100 face value of the notes.
But the same day, Bloomberg financial service assessed the value of the notes at $96.897 for each $100 face value, suggesting that Citron paid too much for the securities.
The deal netted Merrill fees and profits of $2 million to $6 million, according to bond experts and financial advisers who have said the trade was among the most unusual that Citron made.
Merrill Lynch officials say that Citron and others were sophisticated investors, well aware of the risks.
But that is the same losing argument that Merrill Lynch and other brokerages used in a suit brought by San Jose after the city sustained a $60-million loss in 1984, according to attorneys for the city who now represent Orange County bondholders.
However, Alan Bromberg, a professor of securities law at Southern Methodist University in Texas, noted: “Everybody who sues claims they are unsophisticated and everybody claims that investments are unsuitable. That may succeed in some of the exotic securities, but it is almost impossible to prove on the general issue of over-leveraging.”
Citron took out short-term loans and invested those funds in long-term securities, which meant he was betting that interest rates would stay level or decline.
Merrill Lynch brokers provided reports that lent at least some comfort to Citron in laying those bets. The firm provided one investment report about a year ago that proclaimed, “The . . . case for lower rates is intact, even with a recovery.”
But in that same time period the majority of economists were warning that rates would head upward, though almost all economists failed to predict the steepness of the increases.
Times staff writers Stuart Silverstein in Los Angeles, Scot J. Paltrow in New York, Dan Morain in Sacramento and Eric Lichtblau and Matt Lait in Orange County contributed to this story.
* BANKRUPTCY COVERAGE: Related Orange County stories inside. A26-A27, D1-D2
